Euro zone bond yields edge up, Fitch lowers French ratings outlook

LONDON, May 18 (Reuters) - Government bond yields edged higher across the euro area on Monday as investors got ready for another week of hefty supply, while French bonds saw some underperformance after its ratings outlook was lowered by Fitch Ratings.

France’s 10-year bond yield rose to 0.005%, its highest level in almost a week, pushing the gap over higher-rated German Bund yields to around 51.5 basis points — its widest in over a week.

Fitch on Friday lowered the outlook on France’s AA rating to negative from stable, citing a substantial worsening in the public finances and economic activity as a result of the coronavirus.

“France is on the back foot after the rating update. This being said, I would not term that a huge surprise — the direction of travel is clear. Even with exceptional ECB support, rating agencies have to nod to deteriorating debt dynamics,” said ING senior rates strategist Antoine Bouvet. He was referring to the European Central Bank’s massive asset-purchase programme.

In an interview published on the ECB’s website, ECB chief economist Philip Lane said the coronavirus-hit euro zone economy probably will not return to its pre-pandemic levels until next year at the earliest.

Bond strategists also noted further signs of a weakening in Germany’s stance towards further fiscal easing. The German government expects to suspend its constitutionally enshrined debt brake in 2021, as it did this year, the newspaper Handelsblatt said on Friday, citing government officials.

Across the euro zone, most 10-year bond yields were around 1 to 2 bps higher on the day — facing upward pressure from another week of hefty new bond supply.

Germany Bund yields were up on the day at -0.53%.

Commerzbank analysts expect sovereign bond auctions across the euro zone to total almost 24 billion euros this week, a number that could jump to over 40 billion euros once a BTP Italia bond sale is included.

Italy will offer the new BTP Italia inflation-linked bond due in May 2025, targeting retail investors, from May 18 to May 21. (Reporting by Dhara Ranasinghe, editing by Larry King)